Is an ADU a good investment for you?

If you’re reading this, chances are good you’re already considering building an ADU (aka accessory dwelling unit), or a carriage house, or in-law suite, on your property. You may be wondering: is an ADU a good investment? In short, yes. But the gains you can expect to realize will depend on the kind of ADU you choose to build. Let’s take a look at some numbers.

Since Creative Carriage Builders is based in Atlanta, we’re basing these numbers on what’s typical for ADU builds and rental prices in Atlanta. Of course, rental income will vary by neighborhood and by the quality of the finishes you choose. It will also vary based on whether you choose to treat your ADU as a long term rental, or a short term vacation rental on sites like AirBnB or VRBO. This can result in significantly more income from the same property, but is also a lot more work for you as the homeowner.

1 bedroom garage conversion

A garage conversion is the cheapest (and fastest) way to get into the ADU business. You can take advantage of the existing foundation and structure of your garage, resulting in a huge savings over completely new construction. An average 2 car garage is between 400 and 600 square feet – the size of your build will be limited to the existing foundation.

• upfront cost: 120k
• square footage: 500
• expected rental income: 1500/mo
• yearly cash on cash return: 15%
• expected rental income (short term rentals): 2200/mo
• yearly cash on cash return: 22%

1 bedroom detached ADU, approx 600 square feet

A completely new detached ADU, while more desirable as a rental property, also means a higher upfront cost. A footprint of 600 square feet will allow for a comfortably sized one bedroom.

• upfront cost: 200k
• square footage: 600
• expected rental income: 1900/mo
• yearly cash on cash return: 11.4%
• expected rental income (short term rentals): 2800/mo
• yearly cash on cash return: 16.8%

2 bedroom detached ADU, approx 750 square feet

750 square feet is the maximum size of ADU you can build in Atlanta, which allows enough floor space to fit in two bedrooms.

• upfront cost: 240k
• square footage: 750
• expected rental income: 2400
• yearly cash on cash return: 12%
• expected rental income (short term rentals): 3600/mo
• yearly cash on cash return: 18%

What about financing? At this time, the most common way to finance an ADU is with a home equity line of credit, or HELOC. Let’s say you were to build a new 1-bedroom ADU with $50,000 and a $150,000 HELOC at a rate of 8%. Your monthly mortgage would be $1100, so if you assume $200 a month of extra taxes, insurance and maintenance, you’d still be clearing around $600 a month.

How much value will an ADU add to my property?

A 2021 study by Porch Research found that, across the country, houses with ADUs sold for an average 35% more than homes without them. Like other upgrades you can make to your home, an ADU will increase your property value. But unlike say, a pool or a kitchen renovation, it can also generate revenue for years and years before you sell your home. And when you do sell, potential buyers are allowed to include projected rental income from the ADU as part of their monthly income, increasing their buying power.

The power of an ADU, as an investment, is that it enables you to generate more value based on what is probably already your biggest investment, your home. It’s a unique opportunity to make money from the land you already own, and contribute to the community as well.